Investment management insights and commentary

Posted in Principal Global Equities

Back in February of this year, I attended one of my favorite CIO roundtables in New York called U.S. Institute CIO Roundtable. This year, most of the presentations highlighted the applications and possible disruptions of Artificial Intelligence (AI) in the asset management industry. While it was interesting to hear about the different applications of AI, most of the presentations came across in what I call the “Terminator” style or “man versus machine.” Since the movie the Terminator came out a while ago, I don’t believe I’m giving away the ending: humans find a way to defeat much stronger and faster machines!

In the world of advanced technology, however, I see things a bit differently. For instance, the most helpful contribution of AI to the asset management industry is in intelligence augmentation (IA). In my view, IA is more like the 1970s science fiction and action television show, “The Six Million Dollar Man” (my age group would remember), where bionic implants can make a human stronger and smarter. That said, I believe there’s no reason to fight the machines, as in the Terminator. In reality, they will not take our jobs away, but make us more efficient.

Talking with other attendees at that conference, I found that many fundamentally-oriented CIOs and portfolio managers didn’t believe that machines could replace or replicate their research insights.

Even one attendee used the analogy that using machines to invest is like using a GPS app on our iPhone. Since we’ve become so dependent on these apps, maybe we’re were worse off and have even lost our sense of direction. I tend to agree with his analogy. It’s not the machine’s fault for us becoming technologically dependent. Rather it’s the human fault because they rely too much on the machine and loses their judgment when the machine in a rare instance is giving bad advice.

That is why I believe there is a more immediate opportunity for IA to bring efficiencies into our industry. Specifically, at Principal Global Equities, we have been using technology and quantitative-based tools since 2001 to make our “humans” better investors. These are stock selection tools or risk management tools used to tilt the probabilities of outperformance in our favor. They also function as information efficiency tools to ensure our analysts and portfolio managers are focusing on relevant information that they can use to make better investment decisions.

The next generation of our tools will also use IA . For example, developing a “virtual analyst,” “virtual portfolio manager,” “virtual risk manager,” and “virtual trader” to replicate many of the lower-order tasks currently performed by these professionals. I believe that allowing them to focus their intelligence on tackling higher-order problems for our clients by replicating their workflow will only make them better analysts, portfolio managers, risk managers, and traders.

With these tools, everybody can do their jobs more effectively and efficiently. For example, since we implemented these systematic investment decision-making tools in 2002, our equity assets have more than quadrupled and we’ve done it with roughly the same number of investment professionals as in 2002. It’s been a remarkable balance between efficiency and effectiveness to say the least. That said, IA is no longer just a field of dreams, in central Iowa, it’s already a reality.

_________________________________________________________ Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of February 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.

The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document.

Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided. Investing involves risk, including possible loss of principal. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Insurance products and plan administrative services are provided by Principal Life Insurance Company. Principal Funds are distributed by Principal Funds Distributor, Inc. Securities are offered through Princor Financial Services Corporation, 800-547-7754, Member SIPC and/or independent broker/dealers. Securities sold by a Princor Registered Representative are offered through Princor®. Principal Funds Distributor, Princor and Principal Life are members of the Principal Financial Group®, Des Moines, IA 50392.

Back when you were playing on the playground in grade school, do you ever recall the teacher asking all kids to “get along” and “play nicely together?” Well, this same way of thinking applies to the world of equity investing. I believe it’s possible that the three equity investment approaches — active, passive, and smart beta — can “get along” and have a place in providing value to an investor’s portfolio. Moreover, it’s all about creating a more efficient portfolio where all three approaches can contribute. Toward that end, let’s define some pros and cons to each approach.

However, before all three approaches of investing can earn an allocation claim in an investor’s portfolio and play nicely together, a few things need to happen in the industry.

Yes, it has been a tough three-to-five years for United States large-cap managers because most active managers failed to beat their indexes after management fees. Consequently there’s been a significant shift from active to passive investing. Now, equity-risk premia and factor-based style investing is coming under the more recognized moniker of “smart beta,” further challenging the actively managed assets. Fees are also squeezing investors’ profit margins.

This begs the question: is active management dead? Absolutely not! Moreover, there will be a second revival of active management with some necessary changes. Here are a few other questions to consider:

What part of your returns can be replicated by stylistic betas that I can buy cheaply, say 20 basis points
What part of your returns cannot be explained by this cheap beta?
I believe that active managers who provide more stylistic beta returns but charge active fees for alpha will have to reduce their fees or cease to exist because of lower-cost alternatives. The further fee reduction will force industry consolidation and will also define who the true fundamental alpha providers are. These active managers will command a premium for active fees.

After a period of lower fees for active managers, they are likely to beat the passive indexes and true alpha will come to fruition. In this environment, style betas such as value, momentum, and quality will thrive. As an active manager, you have to provide uncorrelated alpha to these style betas or simply be better than your competitors within your styles and offer something more within those styles. Also note that this movement has already started. For example, we’re already seeing investors asking for highly concentrated, highly active portfolios. However, beware of the pitfalls: a portfolio could be highly concentrated but you could be still getting all stylistic beta, not alpha! In addition, we have observed an acceleration of fund closings and deceleration of fund openings since the financial crisis (see chart below).

Let me also address the smart beta movement. I believe smart beta will be a bigger challenge to passive management and will start to take market share from passive as the fees for smart beta products continue to decline. After all, research shows that passive index funds are not efficient in “Markowitz efficiency” sense, which means that there is always a portfolio that provides a better risk/return trade off than passive indexes. In other words, an investor can get a better Sharpe ratio or return per amount of risk, than a typical passive index fund can provide.

If this is the case, however, why do active managers underperform? After all, search for active “alpha” and active management has the same objective of achieving superior Sharpe ratios than passive index funds. The answer is not in achieving high Sharpe ratios but achieving superior Sharpe ratios net of management fees. That’s why I believe, declining fees in the smart beta products will give a challenge to passive investing in index funds. After all, the main benefit of smart beta is to provide better diversification of risk premia and style betas than an investor gets in a capitalization-weighted passive index fund. With lower fees, it’s possible to combine different stylistic betas (equity risk premium such as value, quality, low volatility, momentum, size, carry) in a much more efficient and diversified way than a capitalization-weighted index dictates that the investor should hold.

To summarize, it‘s all about investment efficiency, “net” of costs. Let’s face it, some passive investment is still needed to anchor portfolios to lowest possible cost even though you know that it’s not efficient. Then it’s ok to “pay–up” for alpha uncorrelated to style betas to earn excess returns based on forward-looking judgment of active managers. Finally, completing the portfolio with diversified stylistic betas with low cost to achieve desired efficiency, such as higher returns, lower risk and/or downside protection, based on the risk tolerance of the investor. This “building blocks” portfolio approach can also be customized for individuals, even using “robo” advisors. The net result is investors having greater flexibility to design portfolios that are more efficient to achieve their risk/return objective, net of fees.

Smart beta has turned investment efficiency argument into a continuum rather than the bi-polar world of active versus passive. Enter the age of personalization where one no longer has to fit the objective to the strategy products, but can rather fit the strategy products to the objective. We will all win after the industry figures out how all these solutions ‘get along’ like when we were young on the playground.

_________________________________________________________ Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of March 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision.

The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account.

Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document.

Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided. Investing involves risk, including possible loss of principal. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Principal Funds are distributed by Principal Funds Distributor, Inc.

Before Netflix, Pandora, and Amazon, there was Blockbuster Video that rented video tapes and compact discs (CD’s). The younger side of the millennial generation may not know what I’m talking about because the new technology of streaming videos and listening to podcasts has taken over video tape and CD rentals. In the 1990’s, we all rented videos for entertainment, but when a video tape was returned late, even if it were by one day, we had to pay a hefty late fee. We were even charged a “rewind” fee if the video tape wasn’t rewound to the beginning! Those fees really hurt on a low budget. I hated paying late fees and I wasn’t alone! Although Blockbuster’s business flourished as the majority of their revenues came from these dreaded late fees, not many people asked “how can you make a sustainable business from fees that your clients don’t want to pay?” Blockbuster enjoyed growth in revenues; that is, until the new disruptive technology came and changed the industry. Take Netflix for example, customers NEVER had to pay late fees and Blockbuster went bankrupt later on!

Netflix disrupted Blockbuster’s business model, much like risk premia-based investing (also known as smart beta) is disrupting the asset management industry. Smart beta is the measure of certain factors such as value, momentum, quality, and size: styles that every manager is associated with or advisors would pick managers from. Even if most of us fundamentally-oriented active managers think developments in smart beta approaches won’t impact us, I believe they will. To be more specific, I believe they will impact our fees, similar to the Netflix/Blockbuster situation. This disruption has made it crucial for us to take a deeper look into our organizations to identify fees that our clients don’t want to pay; our “late fees.”

“Alpha” level fees charged for mostly “beta” returns are our version of “late fees.” Beta is cheap and alpha is expensive. Smart beta is about separating alpha from beta. Beta is defined as an asset’s move explained by market movements such as an index. Alpha is an asset’s return in excess of its “beta” adjusted expected return. Alpha also captures forecasting skill, not explained by simple style betas. Beta is cheap and alpha is expensive. If you have been charging alpha (high active) fees for mostly (style) beta, watch out! Those fees will be coming down as smart beta providers have been introducing more stylistic beta-based products at a lower cost.

You are not immune even if you have picked stocks bottom-up your entire career or if you are a prominent hedge fund and have never used a quant factor in your life. If the client runs attribution and finds out that, say, 80 percent of your performance is explained by these style betas, the client has a decision to make; especially if you are charging them 2 and 20! The beta portion, the 80 percent of your portfolio in this example, could be worth just 20 basis points which can be replicated easily with the new smart beta ETFs.

We should all look at our businesses very carefully with a client-centric eye. Identify the fees that can be wiped out with this disruptive force and adjust fees fairly reflecting the value of alpha and beta components when possible. Making clients happy is the recipe for long-term success. Otherwise, organizations unable to do so will likely suffer the fate of Blockbuster Video. “Smart Beta and chill” likely won’t replace the phrase “Netflix and chill,” but who knows, especially after some intense quant modeling parties!

_________________________________________________________ Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of March 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision. The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account. Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document. Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided. Investing involves risk, including possible loss of principal. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Principal Funds are distributed by Principal Funds Distributor, Inc. t170227091y

There’s been a lot of recent analysis on U.S. macroeconomic events as well as what the new Trump presidency means for the U.S. economy and financial markets. As we are bottom-up fundamental researchers, I thought I’d offer a different perspective on the market and recent events. That said, I’d like to give you a bottom-up view of the United States as a “fictitious company,” and how we would analyze the firm’s income statement and balance sheet over the next two to three years. Our objective, bottom-up analysis concludes that there is positive fundamental change and an upside potential that warrants investment.

For starters, our research indicates that stocks react to positive fundamental change. The key here is not to overpay for this change. Let’s review where this fundamental change will come from. First, the Trump presidency and the Republican Party sweep of the House and the Senate has signaled that “change” is coming. However, the big question is whether this change is going to be positive?

Let’s apply the proposed changes to an income statement of a fictitious company. Infrastructure spending will likely increase the top line growth or GDP resulting in increased revenues. Moreover, deregulation will likely cut costs from the financial system and release more capital to be invested in more productive, revenue-generating areas within the company and country. This means that gross profit margins will expand for this company because revenues will be higher and operating costs will be down.

In addition, lowering tax rates will increase net profits resulting in higher earnings for the company. Investing released capital on higher return-generating projects and earning higher returns than the cost of capital will likely increase future earnings growth. Earning more on invested capital would encourage the company to increase capital expenditure investments. This also has potential to motivate employees to be more productive because some of these profits could be passed onto them via higher wages and other benefits.

Another key point is whether positive changes will drive valuations higher. After all, we don’t want to overpay for positive change!

Let’s say for argument sake that the stock price of the company has rallied because of some of these positive changes. Valuations are fair-to–high, which makes this “stock” become a “show me” story! What we mean is that as long as the company delivers superior earnings growth, valuations can stay high and could even go higher. So, it’s vital to back up the “show me” story and deliver for stockholders.

How about the risks?

Change certainly comes with its share of risks. For instance, if the company fails to deliver this margin expansion, it will be detrimental because some of these improvements are already reflected in the current valuation of the company. In addition, due to inflation, investors realize the risks and costs are increasing. Consequently, as the company’s capital costs increase, it makes it difficult to earn a positive rate of return over its cost of capital. Moreover, a rapid increase in interest rates would be even a higher risk.

What about the balance sheet of this company that is full of debt? Would it risk bankruptcy at some point? No, as it depends on the cost of debt. As long as the debt servicing is low and the company meets its obligations, the company should retain its competitive advantage of having the best credit lines in the world, thanks to its premier reserve currency status with the ability to continue to issue significant debt with ongoing robust demand for its securities.

Perhaps some investors would see this company (the United States) as a risky investment because of the debt on its balance sheet, which could pose risks to cash flows and margins based on possible global trade and geopolitical disputes. Yet, we believe those risks are limited and manageable thanks to another long-term strategic competitive advantage our company possesses; namely one of the world’s best-written corporate governance “prospectus” (the U.S. Constitution) with its elegant system of checks and balances.

_________________________________________________________ Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of February 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision. The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account. Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document. Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided. Investing involves risk, including possible loss of principal. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Principal Funds are distributed by Principal Funds Distributor, Inc. t17022108dv

Looking ahead in 2017, we have a positive outlook for equities but with a few caveats. Our positive outlook is based on the following main areas:

Trump pro-growth agenda: Trump pro-growth policies will likely benefit company earnings here in the United States, however, these benefits won’t be fully recognized until 2018. Although equities should enjoy a tail wind, the ride will be volatile. That said, investors should be aware of the upcoming short-term risks to corporate earnings (more details under caveat #1).

Earnings growth: In terms of earnings potential, we prefer U.S. equities over international equities, small caps over large caps, and developed markets over emerging markets. We are aligning with earnings growth prospects, which our research shows that stock prices follow earnings over the long-term and valuations matter when earnings growth stops.

Growth at a reasonable price (GARP): In terms of style, GARP should outperform after the worst performance year in history in 2016. Moreover, we believe cyclical value stocks will be the main beneficiaries of broadening growth prospects in the United States and globally. Expensive defensives and bond proxies (dividend yield plays with low growth such as utilities and telecoms) will be more likely to underperform with increasing interest rates and the availability of more earnings growth opportunities in equity markets.

Our positive stance is aligned with earnings growth prospects in equities. For example, 10% expected growth in U.S. earnings should bring 10% returns to U.S. equities (see the chart below).

As investors look ahead to 2017 they should also consider the following caveats when investing in equities:

Don’t expect much for rerating U.S. valuations are high since price-to-earnings (P/E) rerating has already happened, so we don’t expect to see much rerating throughout the year. Accelerated earnings growth would be the only catalyst for further rerating.

U.S. small caps have the highest earnings growth prospects, but also the highest valuations. Delivery of the earnings growth will be the key. U.S. small caps will be the main beneficiaries of Trump’s pro-growth policies such as tax-cuts and infrastructure investments, but the full earnings benefit will not be seen until 2018. As a result, some disappointments may be under way in 2017 before we have visibility on further earnings surprises.

Emerging markets also have high earnings growth prospects and the cheapest valuations. Let’s face it, it’s hard to generalize emerging markets due to the very different countries and companies. However, our cautious outlook resides on potential further currency weakness and country risks, especially with the current account deficit countries: Turkey, South Africa, Mexico, and Malaysia. Further capital outflows and currency depreciation will likely create balance of payment issues for these countries.

Further Chinese currency depreciation will present risks to other Asian emerging market countries that compete for similar exports. In addition, border tax adjustment will be a big deal for emerging markets. In fact, most foreign investors and companies aren’t even aware of it so its potential of making U.S. imports more expensive isn’t fully priced into emerging market earnings growth expectations.

As a result, Trump’s pro-growth policies are positive to earnings for U.S. companies, but it may be a headwind for international counterparts. However, a barbell with the United States on one end and emerging markets on the other may work well to balance increasing growth and cheaper valuations at the same time

Expect heavy penalties for short-term disappointments. There will be some short-term disappointment to earnings so the market will likely penalize those disappointments. Where do we see the disappointment coming from? Export-oriented large U.S. companies within the industrials and technology sectors where stocks rallied; the strong U.S. dollar will be a headwind in the short-term. We believe infrastructure spending will have more time to play out so there will be little earnings benefits to these companies in 2017. However, these stocks have already rallied, so a short-term pull back and disappointment are likely.

Expect volatility. Expectations are high for Trump’s policies to generate growth. However, we’re already hearing rumors around China getting ready to counter act Trump’s policies even though these policies are still unknown! Potential trade wars will likely create volatility in the short-term, so be prepared for increased market volatility in 2017 due to the possible retaliatory policies from China and others.

Positive earnings surprise potential

Leading indicators of macroeconomic activity has been improving, supporting the stock market rally and potential acceleration of earnings growth. Specifically, over the last 30 years, the National Federation of Independent Businesses (NFIB) survey has been a leading indicator of real gross domestic product (GDP) growth. In turn, we believe there may be meaningful upside risks to output growth over the next several quarters (see chart below).

Looking beyond the caveats, where will the positive surprise be? We see this happening within the healthcare, financials, and energy sectors.

Healthcare: Healthcare was the worst performing sector in the United States last year due to drug pricing uncertainties caused by both U.S. Presidential candidates focusing on healthcare as a way to lower rising costs. This created uncertainty and despite strong earnings growth, these stocks de-rated. In January, we have already seen branded drug prices go up by 7.8%, consistent with their 10-year average of 8%. It is business as usual for these companies. In addition, Trump’s priority has been to repeal and replace the Affordable Care Act, which also serves to lower the cost within the healthcare system. With further earnings support and much cheaper valuation relative to the market, healthcare stocks are likely to outperform in 2017.

Financials: Rising interest rates have already been positive for financial company earnings. Although the increasing rate has already been reflected in current earnings estimates, other potential positives such as improving credit profiles, consolidation opportunities, and cost-savings from potential deregulation with business-friendly administration have not. We expect continued outperformance of financial companies with the short-term caveats as discussed above.

Energy: Finally, the new U.S. government’s more aggressive energy policy will likely “jump start” energy investment and production even though we believe the upside in oil prices is limited at around $60 per barrel. However, this is positive for U.S. land drillers and low-cost producers of shale oil. Consolidation opportunities with M&A activity would also create earnings leverage and accretion to companies with strong cash flow generation and strong balance sheets.

In summary, we’re positive on equities, albeit with a few noted caveats around what to expect. Even though more volatility is likely on the horizon in 2017, we believe earnings surprise potential could drive equity markets upward.

_________________________________________________________ Unless otherwise noted, the information in this document has been derived from sources believed to be accurate as of January 2017. Information derived from sources other than Principal Global Investors or its affiliates is believed to be reliable; however, we do not independently verify or guarantee its accuracy or validity. Past performance is not necessarily indicative or a guarantee of future performance and should not be relied upon to make an investment decision. The information in this document contains general information only on investment matters. It does not take account of any investor’s investment objectives, particular needs or financial situation and should not be construed as specific investment advice, an opinion or recommendation or be relied on in any way as a guarantee, promise, forecast or prediction of future events regarding a particular investment or the markets in general. All expressions of opinion and predictions in this document are subject to change without notice. Any reference to a specific investment or security does not constitute a recommendation to buy, sell, or hold such investment or security, nor an indication that Principal Global Investors or its affiliates has recommended a specific security for any client account. Principal Financial Group, Inc., Its affiliates, and its officers, directors, employees, agents, disclaim any express or implied warranty of reliability or accuracy (including by reason of negligence) arising out of any for error or omission in this document or in the information or data provided in this document. Third party content, such as comments to this blog, is not reviewed by Principal Global Investors before it is displayed, although we may remove, alter, edit or adapt any such comments. Principal Global Investors does not endorse, authorize, or sponsor any third party content. Links contained in some blog posts may take you to third-party sites and Principal Global Investors makes no guarantees to the accuracy of the information provided. Investing involves risk, including possible loss of principal. Fixed-income investments are subject to interest rate risk; as interest rates rise their value will decline. International and global investing involves greater risks such as currency fluctuations, political/social instability and differing accounting standards. Risk is magnified in emerging markets, which may lack established legal, political, business or social structures to support securities markets. Principal Funds are distributed by Principal Funds Distributor, Inc. t170118098s